Jim Hightower, the former Texas politician and veteran political wit, was fond of excoriating political moderates as he was of skewering Republicans.
“Ain’t nothin’ in the middle of the road but yellow lines and dead armadillos,” he’d say. In the blue states, the curious phenomenon of middle-of-the-road economic policy in 2009 may turn politics red in 2010.
That’s because trillions of American tax dollars spent on “stimulus” spending have gone into bailing out banks rather than into buying America any new jobs.
And the political effect is terrible for congressional Democrats, who are getting angrier and angrier, just like their constituents. By the time of the next congressional elections in 2010, the political impact of the economic policy decisions of George W. Bush’s and Barack Obama’s Treasury Secretaries, Henry Paulson and Timothy Geithner, could destroy Obama’s majority support in Congress.
A group of non-mainstream economists has been warning about the wrong-headedness of the Bush-Obama approach to financial stabilization. At the recent international conference of post-Keynesians held at Buffalo State College, the consensus was pretty clear that both the Bush and Obama administrations gave America a policy that will do nothing to prevent the financial instability that gave us the financial collapse and the resulting recession.
Current policy, according to L. Randall Wray and Eric Tymoigne of the Levy Institute, “serves to preserve the interests of big financial companies rather than to implement government programs that would directly sustain employment and restore state finances.”
In one of those rare papers that non-specialists can read, these economists don’t go anywhere near the political question of why it is that first the Bush Treasury and then the Obama Treasury flushed trillions of U.S. taxpayer dollars into propping up banks that are “too big to fail” while doing nothing about the crushing burden of household debt—and still leaving at least 26 million people without a steady full-time job.
Unfortunately, Obama’s economic advisory crew is led by people whose views are undistinguishable from Bush’s—the very people who have personally profited from what historian Kevin Phillips calls “the financialization of the American economy.” The post-Keynesians who gathered in Buffalo warned that the incentives for money-manager capitalism have become far, far more lucrative than for industrial capitalism, evidenced by the far higher level of profits scored by financial firms than by industrial firms.
The astounding surge of influence of the financial world has been a bipartisan phenomenon. Former President Bill Clinton’s own Treasury Secretary, Larry Summers, was one of the architects (if deconstruction can be called architecture) of the changes in financial regulation that had been in place since the New Deal. Republicans and Democrats alike gleefully went along with all of that and more, raising money from Wall Street hand over fist. They all sang from the same “free market” hymnbook. Markets were supposed to be self-correcting. Indeed, the Republicans who are called “free-market fundamentalists,” like Congressman Ron Paul and Senator Richard Shelby, criticized the Paulson and Geithner bank-bailout policies by making at least one point in common with the post-Keynesians: They all say that there should be no such thing as a bank or an insurance company that is “too big to fail.”
This past week, Senator Shelby rose in opposition to Senate Banking Committee Chairman Chris Dodd’s legislation that, Shelby says, “significantly expands the federal government’s ability to bail out not only banks, but any large, politically connected company.” The post-Keynesians make the same point.
Thus President Obama is facing a brewing rebellion on the left as well as the one that has been hammering him from the right. His bailout of the banks massively swelled the federal deficit without providing a public-works program that resulted in a surge of hiring. As the Christmastime consumer spending-frenzy approaches, there is still double-digit unemployment almost everywhere and no relief in sight. The Congressional Black Caucus is in open rebellion at the Tim Geithner-Larry Summers “brain trust” that still apparently believes that macro-measures of economic output are a perfectly adequate gauge of economic recovery, even while middle-class and working-class household stress is boiling over.
Even worse, the economic pain in 2010 will hit home even harder. The Pew Center on the States reports that most state governments are so strapped for cash that tax increases, layoffs and service cutbacks loom. Brookings Institution economists have issued a dire warning that local governments everywhere will be following suit.
Thus it’s no surprise that congressional sentiment in favor of a new round of “stimulus” spending seems to be growing—because folks at home, from governors and mayors to households and shopkeepers, are all asking “Where’s my bailout?”
Here’s the political problem: The apologists for the “free market” will be happy to bash the proposed financial reforms the same way they’ve bashed the stimulus spending and the healthcare reform—as big-government programs that don’t, haven’t and won’t deliver benefits to the average family. The Levy Institute economists of the post-Keynesian school warn that the free-marketeers, whether they worked for Bush, for Obama, for Ron Paul or Richard Shelby, are dangerously wrong. The average family would benefit tremendously from the policies prescribed by Tymoigne and Wray, policies that include a permanent public-works jobs program at a living wage, plus household debt-forgiveness, plus “a return toward term lending by regulated financial institutions that hold loans and a restoration of incentives to engage in proper underwriting.”
Tymoigne and Wray argue that the only way to fix the lending institutions is to give working people a chance to start paying their mortgage payments and their credit-card bills.
That’s sober advice that also happens to have a certain genius about it as political advice, though as non-politicians, they never say as much. Sadly, the political rhetoric of 2010 will likely be dominated by Republicans who will bash the Bush-Obama bank bailouts and also bash the massive deficits that those bailouts caused.
As non-Keynesian and post-Keynesian economists alike know, though, the most dangerous thing in the world would be to try to enact aggressive anti-deficit measures because of this thing called demand. If deficit hawks get elected in 2010, and succeed in restricting the actually stimulative “stimulus” spending, then unemployment could get much, much worse, and the downward spiral toward the Depression could get going faster than it could be stopped.
So here’s the punchline: If Obama sticks with Bush economic policies, and if his Senate allies like Connecticut’s Chris Dodd push financial non-reforms that institutionalize “too big to fail” for Wall Street’s irresponsible giant firms, then hunger and hurt in the heartland will tip the blue states toward red.
There’s already a tax revolt on Long Island and in the Hudson Valley in New York State, and a shrill anti-government movement in the permanently dependent, permanently job-losing Buffalo area. Ohio voters just this month reversed themselves with a vote to legalize casino gambling, which is always a sign that a depressed area has become a desperate area, as study after study has shown that casinos cause deadweight economic loss in addition to criminality and family woe.
In Michigan, northern Ohio and elsewhere in the Great Lakes, other automobile-industry centers are already seeing red. Unemployment, housing foreclosures and overall economic stress make those areas prime targets of former Alaska Governor Sarah Palin’s book-promotion tour, where she delivers her anti-government message to some seriously hurting folks.
The Bush and Obama teams delivered for the financial elites on Wall Street, whose bonuses this Christmas will still have them consuming lots of jewelry, high-end watches, designer clothing and imported luxury cars. Meanwhile, a recent Wall Street Journal report shows that sales of low- and moderately-priced items at shopping malls are still depressed. The Target-brand department stores, whose customers briefly became Democrats in 2008, expect lower-than-usual sales because their customers don’t have the money this year.